Target makes bold moves to drive sales

New York -- The front-line focus at Target may be on groceries and a 5% spending-reward program, but the home furnishings department is among those reaping incremental sales, Doug Scovanner, evp and cfo, Target Corporation, told financial analysts at the Goldman Sachs 2010 Retailing Conference.

Target has been making industry headlines with its introduction of the PFresh concept to its general merchandise stores, resetting the floor to layer in fresh produce, frozen goods and other food lines as a way to coax more store visits and drive top line sales. Philadelphia is home to the largest concentration of these conversions, but by the end of the fiscal year about 450 of Target's approximately 1,500 regular stores will have been converted to PFresh; another 400 will be updated in 2011, Scovanner said.

"The layer of fresh food in particular," he said, "is immediately visible to our guests." But Target is using the reset opportunity to also install "our best current thinking in fixtures and presentation" across other departments, especially footwear, electronics and home.

"Home fixtures with better sight lines" lead to departments "that appear to be less densely merchandised," Scovanner explained, but have proven to yield better sales velocity than non-updated home departments.

Scovanner indicated that in the PFresh stores that were first put into operation, starting in January 2010, the project seems to deliver "a sales lift in the range of 6% to 11% as soon as they re-open." This lift, he acknowledged, was initially focused in the new food skus -- but the retailer is "starting to see crossover" to other categories.

A similar result has been seen in the Kansas City test of the new 5% Rewards program. Target is poised to launch this offer nationally in October, as it looks to retire its existing store card setup. With 5% Rewards, shoppers who use their Target branded credit or debit card get 5% off almost any type of purchase. The early-adapters of this program seem to be the most affluent of Target's customer base, and they have increased their shopping frequency by two or three times, totaling as much as 50% more in purchases -- spread across virtually every department and category in the stores.

The goal of both PFresh and 5% Rewards is essentially the same: drive top line revenues. Scovanner said Target management is convinced that the company will succeed in accelerating sales growth while still maintaining its record-high operating margin rates and continue its hard-won expense-control efforts.

"We see adding $700 million to $1.4 billion in incremental sales" net of discounts in the first year of the 5% Rewards program, he said, noting that this comes without investing any capital and without much in the way of new expenses.

The $67 billion retailer has several other major initiatives cooking. In 2011 it will transition away from its long term e-commerce contract with Amazon; it will get closer to opening new, smaller-format stores in the 60,000 to 100,000 square foot range, particularly practical for urban areas; and at some point perhaps in 2013 may open its first international stores, more likely than not in Canada.